Perfect storm for tapering today?

A report showed the pace of home construction surged in November. The S&P 500 has fallen 1.6% from its latest record on Dec. 9. The central bank has said it will hold its target interest rate near zero “at least as long as” unemployment exceeds 6.5%. Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., puts the odds of tapering today at 60%.

Equities: The MAR14 E-mini S&P 500 (CME:ESH14) is up .75 points to 1773.75, below key technical and market profile level of 1785. As we have been noting, if the Fed indeed tapers today, we expect this contract to head lower, possibly breaking the recent low of 1755. However, if there is no taper, we expect a relief rally approaching and possibly breaching 1785. The press conference and Fed statement is a bit more nuanced than taper or no-taper, but at the same time we are all watching to see if there is a taper, which should create enhanced volatility.

Bonds: The MAR14 U.S. 30-year bonds (CBOT:ZBH14) are down 16 ticks to 129’11 in front of the important FOMC announcement at 2 p.m. EST. We stand by our view that the bonds have significant downside potential over the next few months if a tapering cycle does commence today or next month. We think it makes perfect sense for the Fed to taper today. The bonds are below a key pivot level of 130. If the bonds can stay below 130, we think they can fall much farther to at least 125, possibly lower.

Currencies: The MAR14 Canadian dollar (CME:D6H14) is down 37 ticks to 93.62, and the MAR14 Yen/USD (CME:JYH14) is down 47 ticks to 96.98. We think the Yen could fall more. The MAR14 Swiss Franc (CME:S6H14) is down 29 ticks to 112.80. It will be very interesting to see if the Swissie can stay below 113.00. If so, we believe that level will be major resistant and the Swiss Franc could head back toward 1.10. The MAR14 U.S. Dollar Index (NYBOT:DXH14) is unchanged at 80.215. The FOMC announcement today has potential to cause a big move in the USD. If there is a taper, we expect the USD to rally and break above 81.

Commodities: The agricultural grain markets are weak today, with MAR14 corn (CBOT:CH14) down $0.03, JAN14 soybeans (CBOT:SF14) down $0.13, and MAR14 wheat (CBOT:WH14) down $0.07. We believe corn could approach the $4 level. JAN14 RBOB (NYMEX:RBF14) gas is up $0.04 to $2.68. We detect a potential reverse head and shoulders bullish pattern, which could bring RBOB up to $2.83. FEB14 gold (COMEX:GCG14) is quiet before the big announcement today trading at $1,230.

About the Author

Anthony Lazzara, CEO of Newport Beach, Calif., commodities investment firm Lido Isle Advisors, spent 10 years as a trader and floor broker at the Chicago Board of Trade and Chicago Mercantile Exchange. Anthony has significant experience in the energy, fixed income, and equity futures markets. After being a long-time independent futures trader, Anthony saw a tremendous opportunity to educate investors on how to invest in professional traders. Anthony is now focused on his duty as CEO of Lido Isle Advisors.